Financial gains of $110 million a year are expected after two years from a merger of Silver Fern Farms and PGG Wrightson, but was dependent on changing farmer behaviour.
The business case for merging the country's largest rural servicing company and the largest meat company was released yesterday and confirms earlier claims that $60 million would be saved within 12 months of merging, growing to $110 million after year two.
The 36-page PricewaterhouseCoopers report, minus details on the business model and operational structure, was short on figures but went to great lengths to substantiate the case for a partnership to create a vertically integrated supply chain.
It said most of the short-term benefits and two-thirds of the long-term benefits were expected from cost savings and enhanced supply profile.
In addition, one-off restructuring and capital costs of $17 million-$25 million were expected within the first two years, partially offsetting initial short-term benefits.
The vertical integration goal of the merger has been well traversed, but more detail was provided on how Silver Fern Farms (SFF) and PGG Wrightson (PGG-W) would operate.
"Fundamentally, the vision requires suppliers to change their approach to the sale of their livestock and to change on-farm management practices to better meet end-customer requirements," the report said.
This would be through market-reflecting stock prices, a broader range of marketing and production contracts and "more collaborative" stock agent-supplier interaction.
This should allow SFF to promote, under a single brand, smaller meat portions at lower unit but higher per kg prices to more consumers, and to set new standards of quality, taste, traceability, sustainability, animal welfare and innovation.
"The partnership is expected to accelerate SFF efforts in opening up new markets, expanding existing markets and, ultimately, increasing revenues from New Zealand lamb, beef and venison."
Farmers would be presented with the type and specification of stock that markets required, supported by pricing to ensure farmers' co-operation .
"Once agreement is reached on what and when stock is to become available, the agent will proceed to discuss what support is needed to deliver on the contract."
That could include genetics, short- and long-term finance, farm inputs, arrangements to finish to stock and specialist support for animal health, nutrition and feed.
The two parties would meet regularly so SFF was aware of supply flows.
A series of contracts for stock supply was envisaged, offering guaranteed price per kg, a premium for meeting certain specifications and a price per animal so SFF could meet niche opportunities.
In addition, finishing, stock management and share farming contracts would be offered and, initially in the short term, spot market purchases.
The document said SFF would benefit from an increased surety of supply, enhanced supply profile and increased throughput.
It would also mean more lambs closer to the national average weight and that would lead to reduced labour costs per kg processed.
Other benefits should include better workforce management, as a result of a longer kill profile, and increased control over daily and weekly kill flows, which would allow more automation and increased productivity.
The contentious issue of retaining the co-operative structure was covered, but the document also showed how governance would change if PGG-W diluted its shareholding to accommodate other processors joining the entity.
Should shareholding fall from 50% to below 40%, the number of PGG-W directors would decline from four to three.
A drop to below 30% would see the number fall to two with the board remaining at eight directors.
